Today’s Blog – Thursday 21st July 2016

On Friday last week the Governor of the Bank of England, Mark Carney, made a speech in Toronto about risks to the financial system as follows:

“Policies aimed at meeting the goals of December’s international accord on greenhouse-gas emissions will(emphasis added) lead to changes such as carbon pricing, and there is a risk that financial markets will adjust abruptly.”

In our view, the causal connection between a soft accord and the harsh real world changes that would have to be introduced to meet its aims is such that it is an enormous assumption to say that changes “will” occur.

There clearly exists a massive disconnect between the realities of energy supply – trillions of dollars of sunk investment, huge inertia factors in the overall system, ongoing massive cost differentials between fossil and renewable energy, etc – and the perceptions of financial market participants that a few policy changes will do much other than change things at the margins.

The issue of disclosure by oil and gas companies about risks to reserves which might “have” to remain in the ground will no doubt lead to lots of work for the large accounting firms, etc, but add effectively nothing of substance. And as we have noted before most petroleum reserves are held by countries and NOCs that do not disclose them anyway, so how would a Western private company even be able to start from a platform of knowing what the planet’s current inventory of reserves was?

Commodity prices

Crude prices snapped the week’s losing streak overnight, with Brent up ~1% to US$47.17 and WTI up ~2.4% to US$45.75. The latter’s larger rise was caused by the monthly roll-over to a new contract.

The key “numbers” of the day were from the EIA’s weekly inventory report. For once, the crude draw – of 2.3 mmbbls – was in line with the earlier Reuters and API numbers.

Gasoline was unfortunately up – but only by 0.9 mmbbls – and this was partly offset by a distillate draw of 0.2 mmbbls.

The numbers were an improvement on the previous week and the market priced crude upwards accordingly.

Henry Hub also reversed the week’s course, going up by ~2.6% to close at US$2.66.

LNG and international gas

As part of the ever increasing desire by European gas market buyers to reduce their “call on Gazprom”, Finland and Estonia have just procured EU funding to build a sub-Baltic Sea pipeline connecting the two countries.

This increase in gas connectivity between the Baltic nations (who historically have had separate balkanised Russian pipeline sources only) should ultimately facilitate the greater use of ,for instance, the FSRU facility in Lithuania across more than one country.

Governments, fracking, etc

Earlier this week the Victorian Government successfully issued $300M of so-called Green Bonds. The money raised will apparently be kept in a separate jam jar in the Victorian Treasury and only be used for energy efficiency, low-carbon transport, etc.

To us it is amazing that sophisticated financial markets participants invest on the basis of such hypothecation. The Victorian Government spends money on lots of things – some less green than others – so why one small part of its overall funding sources is somehow deemed more virtuous than others is beyond us.

Company news – Oil Search (OSH)

As predicted, OSH has announced today that it will not contest Exxon Mobil’s (XOM) take-over offer for InterOil.

The prioritisation of reason and shareholder value over corporate ego and testosterone is to be welcomed in the LNG club – and yet another boost to PNG LNG expansion as the number one LNG project in the World at present.

Company news – FAR Ltd (FAR)

This blog has officially made the big time! We have been quoted in the extensive current debates taking place in on-line stock chat room Hot Copper over FAR. These have been stoked by Woodside Petroleum’s (WPL’s) deal to acquire Conoco’s stake in FAR’s Senegalese asset.

Like us, the good denizens of that occasionally fractious community seem to think that FAR’s pre-emptive rights (PER) over this deal are potentially very valuable. A typical pre-emption notice period would be 30 to 60 days, so the Management of FAR will no doubt be working very hard at present to try to realise some of the large option value that the PER present.

Quote of the day

Not everyone shares the views above on the potential pace of energy sector change:

“The transformation to a world led by renewables is going to be faster than oil executives think.” – Sir Mark Moody-Stuart, former Chairman of Shell.